A Company is considering two alternative methods of producing a new product. The

Question

A Company is considering two alternative methods of producing a new product. The relevant data concerning the alternatives are presented below. Alternative 1: Initial Investment $50,000, Annual Receipts $36,000, Annual disbursements $16,000, Annual depreciation $12,000, Expected Life 5 years, Salvage Value $0 Alternative 2: Initial Investment $110,000, Annual Receipts $50,000, Annual disbursements $10,000, Annual depreciation $16,000, Expected Life 7 years, Salvage Value $0 At the end of the useful life of whatever equipment is chosen the product will be discontinued. The company's tax rate is 50 percent, and its cost of capital is 11 percent. Calculate the internal rate of return for each alternative. Answer a. 7% ; 9% b. 22% ; 32% c. 18% ; 17% d. 1.8% ; 1.7%

Explanation / Answer

the internal rate of return for each alternative= c. 18% ; 17% as IRR is greater than required rate, so accept the project

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